5th June 2026
Few issues divide small business owners more than the VAT threshold. In theory, it is a simple line: once your turnover passes £90,000 in a rolling twelve‑month period, you must register for VAT.
In practice, it is a cliff edge that shapes decisions about growth, pricing, and survival. And in places like Caithness and the wider Highlands, where margins are thin and customers are highly price‑sensitive, the question of whether to stay under the threshold or embrace VAT registration is not just an accounting matter — it is a question of long‑term viability.
Some argue that it is better to keep under the limit. Their reasoning is straightforward: households cannot reclaim VAT, and adding twenty percent to your prices risks driving customers away. For a café, a hairdresser, or a small tradesman, that extra cost can make you uncompetitive in a fragile local market.
In rural Scotland, where disposable incomes are lower and competition from larger firms or online retailers is fierce, the fear of losing customers is real. Choosing not to expand, and deliberately staying below the threshold, can feel like the safer option.
But shrinking a business purely to avoid VAT is almost always a mistake. The Institute for Fiscal Studies has long warned against artificial behaviour designed to stay under thresholds, and HMRC itself has challenged businesses that split into multiple entities, delay invoicing, or move turnover to family members.
These tactics fall under the rules on disaggregation, and if HMRC decides the structure is artificial, it can force registration, backdate it, and issue penalties. Beyond legality, the economic reality is stark: deliberately reducing turnover means lower profits, stagnation, and vulnerability to competitors who can absorb VAT and scale.
It creates a psychological ceiling where businesses hover just below £90,000 year after year, never growing, never investing, and never breaking out of the trap.
There are, however, legitimate reasons to remain under the threshold. If your business is comfortably below it, and growth would push you only slightly above, staying under can be rational. In Caithness, where travel costs eat into margins and customers are extremely price‑sensitive, avoiding VAT registration can protect competitiveness. But this is different from shrinking. Choosing not to expand is a defensive strategy; cutting back to avoid VAT is self‑sabotage.
The healthier path for many is voluntary registration. For tradesmen, B&Bs serving business travellers, or firms with VAT‑registered clients, registration can be a positive step. It allows you to reclaim VAT on fuel, vans, tools, and materials — costs that are disproportionately high in the Highlands. It removes the fear of crossing the threshold accidentally. And it signals professionalism to larger clients and public‑sector contracts. For businesses planning to grow beyond £100,000 or £150,000 turnover, registration is not a burden but a gateway to scale.
The choice, then, is not between shrinking or growing, but between planning and drifting. A business that plans its VAT strategy — whether by staying under legitimately, registering voluntarily, or using schemes like the Flat Rate or Cash Accounting — can survive and thrive.
A business that drifts, cutting back to avoid VAT, risks stagnation and decline. In the Highlands, where every mile travelled and every pound spent carries a rural premium, the decision is sharper than elsewhere. VAT is not just a tax; it is a test of whether a business is prepared to grow or content to tread water.
The dreaded VAT question will not go away. But the answer is clear enough: shrinking to avoid VAT is almost never the right choice. Planning growth around VAT, or choosing stability under the threshold without artificial manoeuvres, is far healthier.
For Caithness and the Highlands, where survival depends on resourcefulness and resilience, the VAT threshold should be treated not as a trap to fear but as a line to plan around.